2015 – A year in review

With 2015 drawing to a close, it’s a good time to review the year that has been.

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2015-12-21T22:17:23+0000

Source: Bloomberg

The thematics of 2015

The energy complex – The sharp sustained collapse in oil has been the talking point in the commodities complex all year. Oversupply is the key concern as OPEC’s cartel status continued to be questioned as it was unable to work as a unit to drive the price higher and stock piling hit records. Brent hit a year-high of US$68 a barrel in May, and since then it has lost 46% to a 2004 low of $36.70 a barrel.

This has left energy equities being the worst sector globally and has seen mass restructuring of these firms. From the US to the UK, to Asia, to Australia, none have been spared.

What could this mean for 2016?

$20 a barrel? The most active front month contract in Brent is pricing the commodity at US$27. The fact that non-OPEC, non-US producing nations are showing resilience to the slowing demand and are powering ahead with production continues to push the equation to the left.

US shale production will be disrupted due to oversupply issues which will see production slowdowns in late 2016 (more likely 2017) and drive the price back towards US$50 - US$60 a barrel. However, with the current setting, US$20 a barrel is probable in the first half of 2016.

Wage growth – Wage growth globally has been one of the biggest concerns all year. Europe, Asia, Australia and the US started 2015 with anaemic wage numbers – in fact some nations where experiencing negative real wage growth as growth was sub-inflation. Only in the second half of 2015 did the US begin to see signs wage growth was picking up. It was certainly good news for US discretionary stocks which have begun to outperform. Australia’s employment numbers have been something of an ‘aberration’, however even with the amazing employment changes in 2015, wage growth in Australia has been flat.

What could this mean for 2016?

Considering the Fed’s move to lift rates in 2015, one would expect US wages to increase into 2016 as it is part of its two mandates, therefore they clearly see signs this will occur. This should spread to US consumer confidence and consumer spending, which means US discretionaries will remain a sector to watch.

Wage growth in Australia is likely to be a point of contention as expectations vary between organisations and commentators. With the mining boom expected to completely fade into the history books in 2016, Australia’s wage growth is more likely to feel the heat than actually expand – will that put the heat back on the Reserve Bank of Australia (RBA) to cut rates?

Aussie rates shift – 2015 saw the RBA moving rates for the first time since August 2013 to the lowest levels on record at 2%. The housing-led recovery that had driven the ASX and the housing market as a whole got the biggest positive jab of two year rise seeing ‘yield-hunters’ piling into the banks as the net yields on offer drove the index to its highest level since 2006 and its flirtation with 6000 points. It also caused the AUD to shift from its stubbornly strong 80 cent handle into the 70 cent handle. However, the heat in the housing market due to the lower rates led the RBA to introduce macro-prudential rules on fears Sydney was on track for a bubble. This caused the first bear market in Aussie listed banks since 2011 and raised questions about the impact further rate cuts would have on the rest of the economy as its sledge hammer approach was not targeting the areas that truly needed it.

What could this mean for 2016?

Having been told to ‘chill out’ until February and beyond, expectations of further rate cuts in 2016 have been diminishing daily despite fear employment may see pressure in 2016. With the Fed now raising rates, further intervention by the RBA to lower the AUD is also diminishing and the fact that employment is at 5.8% (the lowest rate since May 2014), the ‘chilled out’ RBA is likely to completely freeze rates in 2016.

Lift off – The biggest and most expected event of 2015 was the beginning of the end of the most unprecedented accommodation policies in financial history.

Seven years of US stimulus that saw US$4.5 trillion in balance sheet expansion and an effective interest rate of 0% came to an end in December as the Fed began the slow and arduous process of ‘normalising’ monetary policy settings. The USD has been in the long trade for 18 months and has seen the DXY hit 100 – many see it being the trade of 2016 too.

What could this mean for 2016?

The speed of ‘normalisation’ is going to be the key to 2016. Signs of increasing inflation is going to out the US on a steeper path to normalisation and that will hurt growth and confidence. The market versus Fed pricing remains an issue. The market sees two hikes in 2016 while the Fed sees four. The impact on the USD and the flow on effect to emerging market capital flows, corporate earnings, consumer confidence and global growth will again make the Fed the macro theme for the new year.

Ahead of the Australian Open

We are calling the ASX up 0.9% to 5155.

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